Money Market Funds Vs. Money Market Accounts

Written by

Richard Barrington

Updated by

Kristin Marino

Many people confuse money market funds with money market accounts, but they are two very different things.

Money market funds are investments in the short-term debt of governments and major corporations. Money market accounts are more like savings accounts.

It is important to understand each investment to know which is appropriate for your situation and goals. The information below can help you decide if one of them is right for you.

What is a money market fund?

Money market funds get their name from commercial money markets, which are exchanges where corporate treasurers buy and sell huge amounts of commercial paper to manage their cash flow.

Money market funds are classified as a type of mutual fund with a price that, theoretically, can fluctuate. (With a few exceptions, money funds have been able to maintain their stable $1 net asset value.) They are subject to guidelines set by the Securities and Exchange Commission (SEC) and can be purchased from mutual fund companies or brokerage firms.

Are money market funds safe?

For years, money market funds (MMFs) were marketed and sold as the ultimate safe investment — and this was not a misrepresentation. Declines in the value of money market funds have happened but were exceedingly rare.

So how safe are money market funds today? Because they are investments in assets, safety really depends on the quality of the assets in the fund. So long as fund managers maintain a scrupulously conservative approach in choosing these assets, MMFs are likely to remain boring-but-safe investments that offer relatively low rates of return but a very low risk of loss.

Is a money market fund right for you?

Money market funds are typically used by individual investors that have cash in a brokerage account waiting to be reinvested. Shares are purchased to buy into a money market fund, and they can be sold at any time without restriction. While their cash is parked in an MMF, it usually earns a moderate return and can be easily accessed if necessary. Many funds offer check-writing capability and same-day settlement.

What is a money market account?

A money market account, on the other hand, is a deposit vehicle very similar to a regular savings account. Money deposited in a money market account (MMA) gains interest and the funds are fairly accessible. Like a savings account, depositors are limited to six withdrawals a month from a money market account. Some MMAs offer debit cards or checks but may also require a high minimum balance.

Are money market accounts safe?

Banks and credit unions are permitted to invest money market account deposits in short-term securities like certificates of deposit (CDs), treasury notes and commercial paper, which may translate to higher rates than a traditional savings account at times. These securities may slightly increase risk for depositors; but this may be less of a concern since MMAs are offered by financial institutions which are often protected by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) up to $250,000 per account holder.

Is a money market account right for you?

Money market accounts are often seen as a savings account with check-writing ability. This makes it an effective emergency fund account which earns the highest interest rate available until the funds are needed.

Money market funds vs. money market accounts – feature summary

Frequently Asked Questions

Q: How are money market accounts different from money market funds? Do I risk losing my money in either?

A: From the names, you would expect that money market accounts and money market funds were almost interchangeable. They are not — there are important differences that can affect what you earn and how secure your money is.

Money market accounts are deposit accounts offered by banks. Money market funds are a type of mutual fund. In either case, the interest rate is earned by investing in what are known as the money markets — essentially, short-term debt obligations. However, there are three important differences in the two vehicles:

• Money market accounts draw from a broader pool of resources. While money market accounts are general obligations of a bank, money market funds rely on a specific portfolio of investments. If those investments go sour, the company operating the fund is not obligated to make up for any losses.
• Money market funds pool your money with that of other investors. This means that as money flows in, returns can be diluted. As money flows out, sales can be forced at inopportune times. In the normal course of business, this isn’t much of an issue, but when cash flows are heavy, it can have a material impact.
• Money market funds are not FDIC-insured. For this protection, you’ll want a money market account from an FDIC-member bank.

For most uses, the advantages line up on the side of money market accounts, so shop MoneyRates.com to compare rates and other terms offered on money market accounts.

Q: Is a money market account considered cash in the bank like a savings account?

A: Yes, money market accounts have a great deal in common with savings accounts. As you say, they are considered cash equivalents in that entire balance of your account is available on demand at any time. That balance includes any interest earned to date.

Money market accounts also have fairly similar interest rates to savings accounts. The most recent MoneyRates.com America’s Best Rates survey found that the average money market account these days pays 0.195%. The average savings account rate pays just a few basis points more, at 0.227% In each case, MoneyRates.com found that the most attractive accounts paid rates in the neighborhood of 1%.

Savings and money market accounts are ideal for situations where you need immediate access to your money. That includes both for planned expenditures and simply to have an “emergency fund,” which is a reserve you can draw on when unexpected needs arise.

How to earn higher bank rates

Savings and money market accounts are also useful for accumulating savings from paycheck to paycheck. You may ultimately want to transfer this money into longer term investments. But as an initial step getting the money out of your checking account and into a money market account should allow you to earn a higher rate of interest and make you less likely to spend rather than save that money.

Certificate of deposit: Another option to grow your money

In some cases, you might consider a certificate of deposit (CD) as an alternative to a money market account. The advantage is that CD rates are typically higher than money market rates. The disadvantage is that CDs lock your money up for a specified term with a penalty for early withdrawal. However, if you think it unlikely that you will need your entire balance all at once, you may choose to put a portion of your savings into a CD.

Like savings accounts, money market accounts typically put a limit on how frequently you can draw on the money over the course of a month, so they are not suited for heavy transaction volumes the way a checking account would be.

Other investment options for retirement savings

Also, because of their relatively low interest rates, money market accounts are not well suited for long-term retirement savings. Those low rates mean that they will provide little growth to build your savings over time. In fact, money market rates are currently running below the rate of inflation, so you would lose rather than gain purchasing power over the long run. Investment vehicles with some growth potential, like online stock funds, are more suited to this type of long-term saving.

Q: Would I do better in a money market fund or a money market bank account — or is there really any difference?

A: Money market funds and money market accounts are more different than their names would suggest. Their similarity is that in theory, they are both supposed to be invested in very short-term fixed-income securities. However, the composition of the underlying investments matters a great deal more for money market funds, because they are essentially mutual funds where the return to the investor is determined by the performance of the securities the fund owns, minus the management fee charged by the fund. Money market accounts, on the other hand, are general obligations of the bank that offers them.

As for which would give you a better interest rate, that is something that would vary on a case-by-case basis. Both have variable interest rates, so the rate you sign up for might not be what you earn going forward. Perhaps the most meaningful difference, though, is that bank-issued money market accounts are backed by FDIC insurance, which means you stand virtually no risk of losing money as long as you don’t deposit more than $250,000 in any one bank.

The bottom line is that money market funds come with a bit more uncertainty than you might want from a supposedly safe investment. A money market account from an FDIC-insured bank may not offer you any more in the way of interest, but it will give you much more in the way of security.

Next Steps

Shop America’s Best Rates: See current money market account rate trends: America’s Best Rates survey

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